Valuable Financial Lessons: Roth IRA Accounts for Your Children and Grandchildren

If you have children or grandchildren working this summer, opening a Roth IRA account in their name can give them a head start on their retirement savings. A Roth IRA is an individual retirement account which allows for after-tax contributions of earned income to grow tax-free with tax-free withdrawals during retirement. Parents or grandparents can open and maintain control of a Roth IRA account in the child’s name until the child reaches the age of majority, typically 18 years old. While they are able to fund it on the child’s behalf, contributions are capped at the lesser amount of the 2017 limit of $5,500 or the child’s earned income. For example, if the child earns $2,000 this summer, the maximum amount that can be contributed to the account is $2,000. It is also important to know that any contributions made by a parent or grandparent will count towards their $14,000 annual gift tax exclusion ($28,000 if married and splitting gifts).

There are many opportunities for financial growth and earnings when investing in a Roth IRA at a young age. Compounded interest has the power to build up the account value tax-free for years. Additionally, the earnings can be withdrawn tax-free after they are 59 ½ years old. Typically, an early withdrawal penalty of 10% is applied if the earnings are withdrawn from the account beforehand. However, there are some exceptions to this rule:

• Up to $10,000 may be withdrawn if used as a down payment towards a home penalty and tax-free.
• Money can also be withdrawn for qualified education expenses without penalty, although the taxes will have to be paid on any earnings.

If you are looking to teach your children or grandchildren some valuable financial lessons about savings, opening a Roth IRA account is a great way to do so. Children can begin building wealth for their retirement while they are in a low or zero tax bracket. At the same time parents and grandparents have the opportunity to fund and manage the account while providing a more comfortable retirement for their children in the future. By having an adult contribute to the Roth IRA, children can receive the double benefit of keeping their summer earnings in addition to having money put away for their retirement.